Shocked that companies and mutual funds would invest OPM (Other People's Money) in high-risk investments, the Shocked Investor was originally on a mission to find out if our money ended up in these dubious instruments. This blog now also discusses other financial topics, such as straddles, options, gold, natural gas, agri/food stocks, and the collapse of the US Dollar.

Former Japan's central bank policy board member Nobuyuki Nakahara says the Bank of Japan must drop rates to zero or else the Yen will continue its relentless appreciation - a death sentence to Japanese exporters.

He forgets however, that all major countries are joining in the race to depreciate their currencies. There is no way for all of them to achieve the same goal at the same time.

Bloomberg reports that the Bank of Japan’s decision to expand a bank-loan program was too little and too late and will not halt the yen’s advance.

The BOJ also announced in an emergency meeting that it will increase the amount of funds in the facility by 10 trillion yen (USD $116 billion) to a total of 30 trillion yen. However, Mr. Nakahara says that “The announced measures were meaningless and can’t stop the yen’s advance,” “The action therefore was too little and too late.”

He added that Japan can’t achieve stable and sustained economic growth until exporters get back on their feet.

“Unless the BOJ lowers the policy rate to zero, interest rate differentials between Japan and the U.S. will continue to narrow and weigh on the dollar-yen rate,"

However, the central bank kept its benchmark rate at 0.1 percent today.

“The BOJ should also boost outright purchases of bonds by another 500 billion yen,” Nakahara said. “Increased bond purchases would enable the government to generate funds for more public works spending.” “As a whole, Japan can’t live without spending by companies and the government,”.

Monday, August 30, 2010

The contango in natural gas has dropped significantly. These are the prices as of 11AM today

For reference, these were the prices on September 18th of last year. Note that contango was much larger at the time. For example, it was 24% on the two front months, versus the current 7%. For February contracts it was 51%, now it is 19%.

This is good sign for natural gas and good also for the dreadful UNG. As mentioned previously, we are in HNU.to.

Global multinationals continue to invest heavily in Brazil. However, the capital for investment is coming from Brazil since these companies still have trouble accessing capital.

Global financial difficulties in external markets still complicate the life of multinational. They are relying more and more on Banco Nacional de Desenvolvimento Economico e Social (BNDES).

The downside for Brazil is that they are bringing in fewer dollars for the country to finance its projects. The BNDES loans to enterprises with foreign capital have doubled from $ 9.8 billion in 2007 to $ 20.4 billion in 2009, according to information provided by the bank. Between January and July this year, the disbursements were for multinational companies were $ 8.6 billion.

BNDES said that the law does not permit discrimination between national companies and foreign companies installed in Brazil. Multinationals, however, received no special treatment. The participation of these companies in the portfolio of the bank remained between 15% and 16% in the last three years. From January to July, it is 12%.

Economists believe that the significant growth of BNDES guaranteed investments contribute to increase the supply of products and to control inflation. But it has a side effect, which is to reduce the entry of foreign productive investment.

Projections by the Central Bank, foreign direct investment will not cover the Brazilian external deficit on current account for the first time since 2001. The central bank estimates $ 49 billion deficit and a net inflow of direct foreign investment of U.S. $ 38 billion. This means that the country will depend on the input of at least $ 11 billion in equity and fixed income to balance its accounts.

Nothing to worry for now, given the magnitude of speculative capital that Brazil has been attracting. The information is from the newspaper O Estado de S. Paulo.

Sunday, August 29, 2010

John Taylor, Stanford University Professor and a former Treasury undersecretary for international affairs, said that “In a sense, the Fed caused the bubble” “A priority would therefore be not to create bubbles in the first place,”

Bloomberg reports that central bankers clashed this weekend at their meeting at meeting in Jackson Hole, Wyoming. One of their main arguments was oj how to best contain asset-price bubbles.

Charles Bean, Bank of England Deputy Governor argues that that regulatory tools would be most efficient at deflating a boom without inflicting broad economic damage. John Taylow, however, says they are unproven.

The current Bond bubble: Martin Feldstein, Harvard University Professor, said: “It could well be that anybody’s who’s buying 20-year, 30- year Treasuries is taking a big risk,” “Those prices could come down. I think the Fed is keeping those rates below any kind of long-term equilibrium.”

Bean: “Monetary policy is too weak and ill directed to moderate a credit and asset-price boom without inflicting unacceptable collateral damage,” “Instead if central banks want to manage credit growth and asset prices in order to avoid future financial instability, another instrument is necessary, and that’s obviously macroprudential policy.”

Agustin Carstens, governor of Mexico’s central bank said that the effectiveness of rates against a bubble may depend on how much of it was due to financial advances: “The bubble that we saw was based on huge innovation,” Without such advances, the sensitivity to interest-rate movements “would be quite different.”

Bloomberg concludes that the disagreements among the attendees, which included central bankers from more than 40 countries, may not be resolved any time soon.

Saturday, August 28, 2010

"Vale is investing in the fertilizer industry in order to become a leader in theglobal market."

Even though it is not bidding for Potash, Vale says it has ambitious plans for the fertilizer sector, including acquisition of assets in the coming years. There is already the expectation that the company will fatten its budget for the sector, currently at $12 billion by 2014.

Mário Barbosa, executive director of fertilizers Vale, said that the mining company is attentive to the current environment of consolidation in the sector: "There are companies in the process of consolidation that will become small if they do not join others," "If opportunities arise that make sense, we always look."

With the profile of a buyer, Barbosa led Bunge and Fosfértil and bought almost one new company per year. "You know my past. (...) I bought some 14 companies over these 15 years," he said.

Personal friend of the President of Potash, Bill Doyle, Barbosa said he believed that entering the race for the Canadian company would be a "very big step" for Vale right now. It was BHP Billiton that made a hostile bid of $ 38.6 billion for Potash, a low value that was flatly rejected.

Barbosa confirms by saying that "We're talking about $ 45 billion" he says.

The greater appetite for the mining assets of fertilizers has as its background the prospect of expanding global demand for food.

Barbosa is adamant that he wants Vale as the second in the world in four to five years. Today the mining giant ranks ninth in the potassium sector and fifth in phosphate.

With information from O Estado de S. Paulo.

From Vale's site:

"Vale is investing in fertilizers to supply the Brazilian market and contribute to the development of agriculture in the country. The industry is divided into three important groups of nutrients: potash, phosphates and nitrogen.

Phosphate production consists of mining phosphate rock and then transforming it into phosphoric acid. The main input for the production of many types of fertilizers, phosphate is absorbed by plants in the form of P2O5, among many other micronutrients.

Potassium is a basic nutrient for plant life and promotes resistance to diseases, attacks by insects, low water availability and temperature extremes.

The company has been developing projects and acquiring fertilizer assets with the aim of transforming Vale into one of the world’s largest producers over the next seven years. Vale’s annual output targets for 2017 are approximately 10.7 million tons of potash and 19.2 million tons of phosphate rock."

Thursday, August 26, 2010

According to the ubiquitous Nouriel Roubini, the chances of a double-dip recession have increased to over 40%.

Roubini also said growth will be closer to 0% in the second half of 2010.

Q2 GDP growth will be actually revised down to an a annual rate of 1.2% Roubini said, as according to him, any improvement recently was because of to inventory adjustments.

"The fiscal stimulus will become a drag on growth in the second half of the year, inventory adjustment will have run their course, and there won't be a favorable comparison with the "awful" first half of 2009"

"the employment boost from the census survey will disappear, and there will no longer be a number of tax policies that stalled demand and growth for the future,"

Roubini added that from a monetary policy perspective, the scenario is worse than last year "as all of the Fed's policy bullets will pretty much be gone".

"Banks today are sitting on $1 trillion of excess reserves that they are not lending out" and earning 0.25 percent on, he said. "Why would they want to lend more if we do more QE?"

"The U.S. is facing a liquidity trap", "... with companies discounting prices and a glut in the labor market, the biggest threat to the economy is deflation".

Wednesday, August 25, 2010

Stocks are sinking on very bad economic news, all well expected and not surprising. However, it is quite possible that the Fed will soon announced a 2nd round of quantitative easing. It has no option. If that is the case, stocks, gold, and oil will bounce and become extremely volatile.

Stocks:

Our favorite is IWM (the Russell 2000 ETF):

Oil:

Our favorite is UCO:

Gold:

Our beloved Yamana Gold, AUY:

Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).Please do your own due diligence.

This is not advice. Options are very dangerous and may cause 100% loss.Computed with StraddlesCalc Tool

Friday, August 20, 2010

The Economist published an article about the sad state of world currencies. While just a few months ago Europe’s debt crisis had markets panicking about sovereign risk, it seemed that all roads led to the U.S. dollar. How quickly things change. The Euro recovered, and the US sank.

It is, as we have commented several time before, a battle for a cheap currency. The magazine says that this may eventually cause transatlantic and transpacific tensions: "not everyone can push down their exchange rates at once. For now, though, the dollar holds the cheap-money prize"

"... On August 11th the dollar fell to a 15-year low against the yen of ¥84.7. It perked up against the euro to $1.29, though that was still much weaker than the $1.19 it reached in early June when euro-revulsion was at its worst (see chart 1). The ground the greenback has lost in recent weeks owes to a run of weaker data about the economy, not least on jobs (see box on the next page). On August 10th the Federal Reserve conceded that the recovery would probably be slower than it had hoped. The Fed kept its main interest rate in a target range of 0-0.25% and stuck to its creed that rates would need to stay low for “an extended period”. In addition the central bank said that it would reinvest the proceeds from the maturing mortgage bonds it owns into government bonds to prevent its balance-sheet (and thus the stock of ready cash) from gradually shrinking.

This modest change in Fed policy was widely expected. It signalled concern about the economy while stopping short of panic measures. That did not stop stockmarkets from slumping the day after the Fed’s statement—perhaps because investors had hoped the central bank would go further and commit itself to a fresh round of asset purchases, or perhaps because they were unnerved by the Fed’s more cautious tone on the economy. But the Fed’s shift still seemed to confirm that it is more minded than other central banks to keep its monetary policy loose, a perception that has contributed to the dollar’s slide and helped America’s exporters. The day before the Fed’s decision, the Bank of Japan kept its monetary policy unchanged. The European Central Bank (ECB) has allowed short-term market interest rates to rise as it withdraws emergency liquidity support from the banking system.

Events in America do not determine the dollar’s fate: exchange rates have two sides. The euro has bounced back since June in part because markets are more confident that Europe has got to grips with its sovereign-debt problems. The currency’s strength also reflects a stronger economy. Figures due out after The Economist went to press were expected to show that the euro area’s GDP grew a bit faster than America’s in the second quarter, thanks largely to booming Germany. But the problem of sluggish growth in the euro zone’s periphery has not gone away. A strong euro amplifies the lack of export competitiveness in Italy, Spain, Greece and Portugal. That is one reason why many analysts think the euro is likely to weaken again.

The yen’s rally, in contrast, may have further to run. It is trading against the dollar at levels last seen in the aftermath of the peso crisis in the mid-1990s, when the yen had greater claim to being a haven from troubles elsewhere. But the yen’s renewed strength may not be quite as painful for Japan’s exporters as that implies. Years of falling prices in Japan combined with modest inflation elsewhere mean the real effective exchange rate is below its average since 1990 (see chart 2). Because Japan’s wages and prices have fallen relative to those in America and Europe, its exporters can live with a stronger nominal exchange rate.

What needs explaining, then, is not why the yen has strengthened recently but why it was so weak before. Kit Juckes of Société Générale reckons that the low yields on offer in Japan provide most of the answer. “The yen is under-owned because Japan had by far the lowest interest rates in the world,” he says. But now falling bond yields in America, as well as in most of Europe, have made Japan a less unattractive place for investors to put their money. The more that the rest of the rich world resembles Japan, the less reason there is to shun the yen. There are even stories that China has been buying Japanese bonds as part of its effort to diversify its currency reserves away from the dollar.

Such interest may not be entirely welcome in Japan. A cheap currency is especially prized now, when aggregate demand in the rich world is so scarce and exports to emerging markets seem the best hope of economic salvation. Japan’s finance minister has complained that the yen’s recent moves are “somewhat one-sided”. That kind of talk has spurred speculation that Japan’s authorities may soon intervene to contain the yen’s rise. But such action would spoil the rich world’s efforts to persuade China to let its currency appreciate. It is perhaps more likely that the Bank of Japan and the ECB will follow the Fed’s lead in extending (albeit modestly) its quantitative easing—or risk a rising exchange rate".

The news this week has been that China surpassed Japan and has now become the second largest economy in the world. But Brazil now beats Spain and is the eighth power in terms of Gross Domestic Product (GDP).

Brazil is now rooted firmly in the eighth position among the world's largest economies, this based on official figures compiled by Spanish financial daily Expansion. The ranking of the largest economies has been greatly modified with the global crisis over the past two years.

Based on figures for the first half, Brazil's GDP would be U.S. $ 1.8 trillion, up from $ 1.5 trillion in Spain.

The continuing crisis in rich countries and the rapid recovery of emerging nations like Brazil, made the difference between the two countries in 2010.

IMF Projections

According to Brazilian agency Agestado, the projections of the Fund are for the Brazilian GDP in 2010 to be U.S. $ 1.91 trillion, well above the $ 1.56 trillion set for Spain.

Without a dynamic internal market because of unemployment, Spain became dependent only on exports. But with the crisis in Europe, uncompetitive products and a decline in demand in the U.S., many companies went bankrupt. In total, seven quarters of shrinking GDP, also hampered by the end of the housing bubble that kept 25% of economic growth. Now, the recovery slips and there is talk of another fall at the end of the year.

On the contrary, in Brazil, the international crisis was offset by expansion in domestic market, credit and consumption.

Ranking

Accordnjg to the ranking of the IMF, the United States remains in first place with a nominal GDP projected for 2010 of $ 14.8 trillion, almost triple the Chinese. China comes in second with $ 5.4 trillion followed by Japan with U.S. $ 5.3 trillion. The first European country in the ranking is Germany, with U.S. $ 3.3 trillion, distantly followed by France with $ 2.7 trillion, the UK, with U.S. $ 2.2 trillion, and Italy with $ 2.1 trillion. Brazil is in eighth position, placing already occupied in the '90s, with U.S. $ 1.9 trillion.

Sick Man

In an interview with Spanish daily, former Foreign Minister of the country, Josep Piqué, noted that together the Latin American economies were already the fourth largest economy in the world, surpassing Germany. For him "the sick man of Europe is the world economy." The ranking of the IMF indicates that Brazil's position varied widely since the mid 90s. In 1995, Brazil was the seventh largest economy in nominal GDP, with $ 769.7 billion. The economic crises and the second half of 1990, however, eventually forced the devaluation of the Real in 1999. In 2003 and 2004 Brazil lagged behind countries such as Spain, Canada, Mexico, South Korea and India. Skipping steps Since 2005, however, with the appreciation of the real, and in 2006, with the rapid pace of growth, Brazil has recovered five positions, and arrived in 2009 to ninth place in the ranking of PIBs.

2015

IMF projections suggest that Brazil should keep in eighth place at least until 2015, when the national GDP will reach $ 2.6 trillion. But there will be a significant change in the ranking, since the country will surpass Italy and, will in turn, overtaken by Russia, which should reach 2015 with a GDP of U.S. $ 3.1 trillion. In 2015, according to IMF forecasts, the GDP will reach U.S. $ 18.2 billion. With $ 9.4 trillion, China's GDP will have a little more than half of the U.S.

Thursday, August 19, 2010

And what does the financial media say? "Applications for unemployment benefits in the U.S. "unexpectedly" increased last week to the highest level since November, showing companies are stepping up the pace of firings as the economy slows".

Unexpected to whom exactly?

Futures instantly dropped as the numbers were released.

As Econoday puts it: "Weekly jobless claims are very likely to offer the very first hints that the economy is sinking into a double-dip recession — that is if it does sink into a double-dip recession. Let's start with the last double dip: the recessions of 1980 and 1981-82. The graph above tracks initial jobless claims (red line), measured by the month-end four-week average, against the non-farm payroll count (blue line).

Claims, where high numbers are bad and low numbers are good, jump from about the 400,000 level to over 600,000 by mid-year 1980, fall back to the low 400,000s during the intervening non-recession period of late 1980 through mid-year 1981, then gradually climb to a late 1982 peak of 650,000. Meanwhile, non-farm payrolls, where high numbers are good and low numbers are bad, fall below 90 million during the 1980 recession, recover to 91.5 million during the non-recession period, then take a plunge below 89 million near the end of the 1981-82 recession."

This will not come as news to readers. Germany's Der Spiegel reports that the so claeed fiscal austerity measures that were supposed to fix Greece's problems are dragging down the country's economy into a big hole, with stores closing, tax revenues falling and unemployment soaring.

What did the EU expect?

The result of the fiscal plan is that "Greeks have less and less money to spend and sales figures everywhere are dropping, spelling catastrophe for a country where 70 percent of economic output is based on private consumption".

In fact, unemployment has reportedly hit 70% in some places.

"... This dire prognosis comes even despite Athens' massive efforts to sort out the country's finances. The government's draconian austerity measures have managed to reduce the country's budget deficit by an almost unbelievable 39.7 percent, after previous governments had squandered tax money and falsified statistics for years. The measures have reduced government spending by a total of 10 percent, 4.5 percent more than the EU and International Monetary Fund (IMF) had required.

The problem is that the austerity measures have in the meantime affected every aspect of the country's economy. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies and unemployed are on the rise. The country's gross domestic product shrank by 1.5 percent in the second quarter of this year. Tax revenue, desperately needed in order to consolidate the national finances, has dropped off. A mixture of fear, hopelessness and anger is brewing in Greek society".

Unemployment in the city of Perama "hovers between 60 and 70 percent, according to a study conducted by the University of Piraeus. While 77 percent of Greek shipping companies indicate they are satisfied with the quality of work done in Perama, nearly 50 percent still send their ships to be repaired in Turkey, Korea or China. Costs are too high in Greece, they say. The country, they argue, has too much bureaucracy and too many strikes, with labor disputes often delaying delivery times".

Country in Depression

"The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.

The country's unemployment rate makes this trend particularly clear. In 2009, it was 9.5 percent. This year it may rise to 12.1 percent and economists expect it to reach 14.3 percent in 2011. Those, though, are only the official numbers, which were provided by Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development (OECD). The Greek trade union association GSEE considers those numbers far too optimistic. It considers 20 percent to be a more likely figure for 2011. This would put the unemployment rate as high as it was in 1960, when hundreds of thousands of Greeks were forced to emigrate. Meanwhile, purchasing power has fallen to its 1984 level, according to the GSEE".

"The theory proposes that an investor annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.Proponents of the Dogs of the Dow strategy argue that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies. Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. The logic behind this is that a high dividend yield suggests both that the stock is oversold and that management believes in its companies prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above average stock price gains as well as a relatively high quarterly dividend. Of course, several assumptions are made in this argument. The first assumption is that the dividend price reflects the company size rather than the company business model. The second is that companies have a natural, repeating cycle in which good performances are predicted by bad ones."

The Ottawa Citizen published a great editorial today about the state of the U.S. economy and what it means. Great read for all who believe in the rosy "recovery" picture portrayed by the financial media.

"This is serious. Very serious. The U.S. Federal Reserve, possibly the most powerful financial institution in the world, is on the lookout for deflation.

So what is the Fed doing? Chairman Ben Bernanke and the Federal Open Market Committee are keeping the benchmark interest rate at 0 or 0.25 per cent and have no plans to raise it. Those aren't low interest rates. They are rock bottom rates. That shows just how serious the plight of the United States' economy is.

Indicators are showing that the U.S. is having great difficulty recovering from the Debt Crisis of 2007-08 and the subsequent recession. That's trouble for the world. The largest global economy won't be buying a lot of merchandise from places like China and India if the downturn continues.Meanwhile, Canadians -- who have smugly celebrated that we largely avoided the debt crisis -- should remember that the U.S. is our largest trading partner. When the U.S. sneezes, Canada catches a cold. In fact, the U.S. looks like it might be dealing with a bout of pneumonia. What happens to the U.S., despite the presence of our strong banks, matters to Canada. This exporting nation can't sell its products to a market that has no money to buy.

Keeping interest rates so low is a sign that the U.S. economy is in terrible shape. With rates at an absolute minimum, the Fed is having to inject money into the financial system to create economic activity. Central bankers are usually loath to do this sort of thing. But with the interest rate lever essentially exhausted as a stimulant, there's little left to do. The Fed is worried that the U.S. will fall into a deflationary cycle where companies decrease prices to stimulate demand. That means little in the way of expansion and job creation. That's the kind of situation Japan has faced for decades and that has restricted its economic growth.

Without a properly functioning economy, we lose a lot. Foreign and domestic policy is curtailed because of a lack of funds. Unemployment goes from being temporary to structural. Generations lose hope of creating something wonderful for themselves and their families. The pressure of unemployment can destroy the basic unit of society, the family. Infrastructure, the foundation of the economy, decays, slowing expansion and job creation. A poor economy means that not enough revenue is available to police the private marketplace. Accordingly, capitalism is hampered by the lack of effective government.

The U.S. government must get very serious and very strategic about repairing its struggling economy. The world cannot have prosperity without a vibrant U.S.

At present, the American political system is so divided and fragmented that the proper economic course is obscured by ideology. The U.S. government still needs to confront honestly the reasons for that country's economic meltdown and to establish precise structural remedies to prevent it from happening again.

The world is likely to face trying times until the U.S. discovers the roots of its malaise. In the 1992 presidential election campaign between George Bush and Bill Clinton, the expression, "It's the economy, stupid," pushed Clinton into the office.

BHP has gone hostile in its $40B takeover offer for Potash Corp. The offer was flatly, and correctly, rejected by POT's board yesterday. BHP is simply being opportunistic taking advantage of a depressed stock market.

BHP is offering $130 in cash for each Potash Corp. share, which PO says is “grossly inadequate.”, again correctly.

However, POT rose to $143.17 in New York, perhaps BHP should consider raising its offer to $260?

What BHP is neglecting in this story is that POT is a Canadian success story and Canadians will not give it away that cheaply, specially a red hot company with a product in huge demand.

BHP's Downgrade

Moody’s Investors Service said today before BHP’s statement that it was monitoring the initial offer and would likely place the company’s rating under review for possible downgrade in the event of a formal bid.

The cost of protecting BHP’s bonds from default rose the most in about 21 months. CDSs on BHP jumped 30 basis points to 101 basis points, the biggest increase since Nov. 20, 2008.

Potash Corp. called the timing of BHP’s bid “highly opportunistic and an ill-disguised attempt to exploit an anomaly in the equity market valuation.” POT adopted a so-called shareholder rights.

Tuesday, August 17, 2010

It is August 2010... Deja vu, back to square one, back to the past. Whichever way you look at it, it's a nother sign that not all is well with the economy, in spite of what the financial media says.

Bloomberg reports today that the Federal Reserve bought $2.551 billion of Treasuries "in the first outright purchase of U.S. government debt since October to prevent money from being drained from the financial system".

The Fed actually bought more than half of the securities listed for possible purchase, 14 out of 25 (56%), notes which mature from August 2014 to February 2016,

"The Fed plans to keep holdings in the System Open Market Account, or SOMA, at about $2.054 trillion, the amount it held on Aug. 4, by using the proceeds from maturing mortgage-backed securities to buy Treasuries. The purchases are the Fed’s first attempt to bolster the economy in more than a year".

"The purchases should average about $2 billion per operation, according to Wrightson ICAP, a Jersey City, New Jersey-based research unit of ICAP Plc that specializes in U.S. government finance".

QE II?

“By maintaining the SOMA portfolio at the same level, the Fed will stem the gradual ‘quantitative tightening’ that would otherwise occur, while also furthering its goal of moving toward a Treasury-only portfolio,” said JPMorgan Chase & Co. strategists “On the face of it, this change seems minor, and almost operational in nature. However, it is not insignificant. JPMorgan Chase strategists estimated the Fed will buy about $284 billion in Treasuries during the next year, or more than the combined purchases of Japan and China during the year ended May".

Abdolreza Abbassanian, chief grain economist at the UN Food and Agriculture Organization, says that "This is very serious," "It's a desperate situation because it has caught everybody off guard. We're not facing the situation of two years ago but there is a risk of destabilising panic."

Putin said it was a "temporary ban on wheat, corn, barley, rye, and grain products until the end of the year due to abnormally high temperatures", and added that Russia needs to cap domestic food prices and build its own reserves.

Embraer, symbol ERJ in New York, will designing its largest aircraft yet, the KC-390. The cargo plane will be suitable for transport of troops, tanks, refueling and general cargo. Its first flight will be in November 2014, shortly after the roll our ceremony. The first flight of series unit will be held two years later, in 2016.

Air Force Command is the lead investor in the program. In April 2009 it authorized a a total allocation of $ 3.028 billion for project development and production of preliminary models.

Two weeks ago the Brazilian Air Force announced its willingness to purchase an initial batch of 28 KC-390 aircraft. At current market value of equipment of the same class, the business is estimated at $ 3.04 billion.

"With this, the government makes it clear that the program is irreversible and in tune with the national strategy," said Defense Minister Nelson Jobim.

The KC-390 will play in a huge and rich international market. The payload rose from 19.5 to 23.6 tonnes, four thousand pounds more than in the initial specification.The electronic configuration adopts the Computed Air Release Point, CARP, which allows the release of cargo with precision. The pilots will have digital displays and night vision system from optical resources integrated with helmets.

The KC-390 will have specific resources for self-defense, as decoys for missiles and jamming devices.

The engine supplier has not yet been decided. Engines must have less than 30,000 pounds and more than 25,000 pounds of thrust. It is a way of keeping costs down without loss of performance: the jet will fly at 850 km/hour, with at least 15% cheaper than competitors.

The aircraft will be able to land and takeoff on poor runways, including semi-prepared ground, with holes up to 40cm deep.

The tale of two countries: while in the U.S. debt continues to soar, and income tax collection continues to drop, in Brazil the collection of federal taxes reached a new record high in July, U.S. $ 67.97B, according to data released by the Internal Revenue Service.

The proceeds for the month of July was the 7th consectuive monthly record, meaning all months this year have reached new records.

The result was 10.54% higher than June of this year and represented high (real) of 10.76% compared with July 2009.

On top of the giant pre-salt oil reserves, PBR appears to have found the largest land-based reserves in Brazil in the Amazon region. While estimated volumes may be lower than those in the ocean, the quality of the oil is excellent.

Petrobras today has four well drilling rigs operating in the region and at the beginning of next year, the consortium formed by HRT and Petra Energy is expected to start drilling in the first quarter. The prospects for discoveries are encouraging, according to those involved in the effort - HRT alone estimates reserves of 1.5 billion barrels.

Petrobras, in turn, may have found the largest field in the region, or actually in any land area in Brazil. None of the companies talk about the subject, citing impediments caused by the silent period preceding the issuance of shares. Industry sources, however, indicate that the discovery in the block SOL-T-171 has reserves of 180 million barrels. The volume is small compared to the billions of barrels of pre-salt, but it is an oil of excellent quality, with great market value.

Petrobras has already obtained approval in the PA development plans for the SOL-T-171, which must include the drilling of new wells. The concession is near Urucu and it would be producing, according to sources, as a long duration test.

In addition to this discovery, the state announced last week it had found gas in SOL-T-150, which is the route of the pipeline linking the Urucu Manaus, opened in November last year. Petrobras also has two older reserves in the region, not yet developed, forming the pole-Juruá Araracanga, ready to go into production. The latest information from the company indicated that the areas would be opened in 2012.

The world's economy may be in shambles, but Brazil is one hot country.

Petrobras' profits in the first half of 2010 were R$16.02 billion (USD $9.2B), the largest in history for the period among all publicly traded Brazilian companies.

The previous best was also by PBR at $15.7 billion (USD $9.0B) from January to June 2008.

Last Friday the company also announced net income of $8.295 billion (USD $4.7B) in the second quarter of 2010, an increase of 1.65% compared to R $8.160 billion established in the same period of 2009.

PBR is one hot company, but it is not the only one. Many top Brazilian companies which are global giants have joined it.

Vale, Itau and other banks have registered the 20 largest profits ever. The net gains of Vale, Itau, Bradesco, and Banco do Brazil in the first half of this year also are among the 20 best results ever recorded by Brazilian companies. Vale posted a profit of $9.5 billion (USD $5.4B) from January to June this year, the eighth largest profit in the ranking prepared by Brazil's Economatica.

Itaú Unibanco (ITUB in New York), had a profit of $6.3 billion (USD $3.6B) in the first half, and achieved the greatest net gain for a Brazilian bank traded in the period, reaching the 12th spot among the largest profits of publicly listed companies in Brazil. This in spite of the fact that Brazilian banks are quite conservative (more so than the much touted Canadian banks).

Brazil's Bradesco bank and also recently released its earnings, with net gains of $5.07 billion (USD $ 2.9B) and $4.5 billion (USD $2.6B) in the first half, respectively. In the ranking of the top 20 results for the period January to June, BB (Banco do Brasil) occupies the 16th position, while Bradesco arrives in 20th place with the balance of this year.

POT's board of directors has rejected an unsolicited takeover proposal from BHP for $39B, or $130 a share in cash.

POT is trading higher by 29% in pre-market today.

POT's Chairman Dallas Howe said that “The Potash Corp. Board of Directors unanimously believes that the BHP Billiton proposal substantially undervalues Potash Corp. and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects,”

Given that POT trades at CAD$112.50, the offer is indeed ridiculous. Obviously it is a n initial low ball number to start the conversation.

With the expected increase in population as well as the quality of food that the new middle classes of China and India and elsewhere will eat, the fertilizer markets are going ot be a very hot area, hence the high level of activity.

Global population will grow by one third to 9.1 billion in 2050 from 6.8 billion, according to the United Nations.

Monday, August 16, 2010

This is something we wrote about several monsth ago. With a declining population, as well as a very weak economy, reverse mortgages are becoming quite popular.

Reverse mortgages allows home owners to get a monthly income stream by surrendering a portion of the equity in their homes. However, inteerst rates and fees charged by banks, as well as term conditions could well may the home owber lose the entire value of their homes.

The Fed warned today (where have they been?). However, the guidance sets no limits on fees that can be charged for reverse mortgages.

Reuters: "Reverse mortgages present substantial risks both to institutions and to consumers, and, as with any type of loan that is secured by a consumer's home, it is crucial that consumers understand the terms of the product and the nature of their obligations," the regulators said in a statement.

"Lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves," they said.

Supervisors said they want to ensure that lenders determine whether or not borrowers are able to continue paying insurance and taxes on the property, and avoid conflicts of interest by lenders trying to bundle the loans with other products.

"Consumers are not always adequately informed that reverse mortgages are loans that must be repaid (and not merely ways to access home equity)," the agencies said.

"In fact, some marketing material has prominently stated that the consumer is not incurring a mortgage, even though the fine print states otherwise."

Egon von Greyerz, from the swiss company Matterhorn Asset Management, says that there will be no double dip... it will be a lot worse and the world economy will soon go into an accelerated and precipitous decline. Keep in mind that this compnay specializes in gold investments.

This deline which will make the 2007 to early 2009 downturn seem "like a walk in the park".

He writes today: "The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced. But his will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer".

The End of an EraThe hyperinflationary depression that many western countries, including the US and the UK, will experience is likely to mark the end of an era that has lasted over 200 years since the industrial revolution. A major part of the growth in the last 100 years and especially in the last 40 years has been built on an unsustainable build-up of debt levels. These debt levels will continue to swell for another few years until the coming hyperinflation in the West leads to a destruction of real asset values and a debt implosion.

In the last 100 years the Western world has experienced a historically unprecedented growth in production, in inventions and technical developments leading to a major increase in the standard of living. During the same period government debt, as well as private debt have grown exponentially leading to a major increase in inflation compared to previous centuries.Total US debt to GDP is now 380% and is likely to escalate substantially.The coming hyperinflationary depression and the credit and asset implosion that is likely to follow will most probably lead to the end of a 200 year era of growth for the Western world. If only the excesses from the 1970s were corrected we might have a circa 20 year decline. But more likely we will correct the era all the way back from the industrial revolution in the 18th century and this could take 100 years or more.

So after the tumultuous and very painful times that we are likely to experience in the next few years, the West will have a sustained period of decline. All the excesses in the economy and in society must be unwound. These abnormal and unreal excesses are not just corporate executives, bankers, hedge fund managers or sportsmen earning $10s to $100s of millions but also a total collapse of ethical and moral values as well as a breakdown of the family as the kernel of society.

Most people believe and hope that this major trend change could not happen today with all the measures that governments have at their disposal. But very few people comprehend that it is precisely the government interference, controls and regulations as well as money printing that have created the problems in the first place. Power corrupts, and the more pressure a government is under the more they intervene. Because they believe that their interference in the economy will save the country – read Obama, or the world – read Gordon Brown. Little do they understand that each interference, each regulation or each dollar or pound or Euro printed will exacerbate the problems of the economy manifold.

Governments now have two options; continue to spend and print money like the US or introduce austerity programmes like Europe. Whichever way they chose will not matter since they have reached the point of no return. The economy of the West cannot be saved by any means. But governments both in the US and in Europe will still apply the only method they know which is to print money.

Deflation Inflation or Hyperinflation

The only reason that the US could build up such a major debt is that the US dollar has been the reserve currency of the world and therefore the US has been able to finance its debts and deficits internationally. The US has now reached a point when debts have to increase dramatically for the country just to standstill. Like all Ponzi schemes this one will also come to an end – and this very soon. The US dollar will decline dramatically and lose its reserve status and the US government will be unable to finance its deficit in any market. This process will lead to endless money printing, collapsing treasury bonds (substantially higher interest rates) and the dollar becoming worthless in a hyperinflationary black hole.

Let us just reiterate that hyperinflation arises as a result of money printing leading to a currency collapse and not from demand pull. The slight deflation that we are experiencing currently is a prerequisite for hyperinflation. The fear of a deflationary implosion forces governments to print money, leading to a collapsing currency which historically has always been the cause of hyperinflation".

Mr. von Greyerz says although many experts make the analogy between the deflationary period in Japan since the 1990s and the US today, the US is in a totally different situation for the following reasons:

In the early 1990s Japan could still export their production to the rest of the world.

In the current downturn all countries (even China and India) will suffer and there will be no one to export the problems to.

The ability to export made Japan a creditor nation with major payment surpluses. US are a major debtor and have been for 25 years.

Japan had a very high personal savings ratio at the time (which has now disappeared). US has had a declining savings rate for years (the US savings rate is now going up which it always does in a downturn).

The balance of payments and the personal savings surpluses made it possible for Japan to finance their budget deficit without resorting to QE. Very soon he US will only be able to finance their deficits with QE and so will most of the rest of the Western world.

Japanese unemployment in 1992 was 2% and went slowly up to 5% by 2000 where it is now. Real US unemployment is 22% and increasing.

"The above are some of the reasons why the current US situation is totally different to Japan. QE will accelerate in the US and worldwide".

We computed the relative strentgh indicators of all ETfs that trade in the U.S.. This indicator is extremely useful in showing which stocks (or ETFs) are overbought or oversold. Here are the top 25 most overbought and top 25 most oversold ETFs, sorted by the average of all timeframes (short, medium, and long).

The overwhelming presence of bond ETFs in these results is astounding. This may well be an indication that something is amiss.

Top 25 Most Overbought

The worst offenders in this category are all bind ETFs: EMB (emerging markets bonds), BIV (intermediate term bonds), and GBF (U.S. Govt. and corporate bonds).

Top 25 Most Oversold.

These would be the most attractive to buy based on this indicator.

The top 3 are quite interesting: IAU, PST, and TBT (click on each link to receive buy/sell alerts)IAU is the gold ETF. PST and TBT are ultra short bond ETFs (7-10 year and 20 years respectively). This clearly reflects the fact that bond ETFs are overbought.

Spanish banks continue to show signs of deep trouble. They borrowed US $180 billion from the European Central Bank in July, just under a third of the overall amount lent by the ECB.

Reuters reports: "Spanish banks had tapped the facility for 90 billion euros in April before interbank markets gummed up on fears other euro zone periphery countries could face debt crises along the lines of Greece.

A source said ECB borrowing by Spanish banks eased in the last week of July, after the results of stress tests on European banks were published. Spain's lenders came through better than feared even though five of the country's smaller banks failed.August data would likely show less reliance on the ECB, the source said.But Carlos Peixoto, bank analyst at BPI, said that data were unlikely to turn around in August given money market conditions had worsened in recent days.

"It's already discounted that in August, banks will still be accessing ECB funding," he said."Everyone is now looking toward September and October to see if the markets open to the smaller Spanish banks and there is investor appetite for their debt."

In Venezuela, there are three types of exchange rates for the U.S. dollar: the basic dollar, the oil dollar, and the parallel dollar.

However, legally, there is only the first two. The real one (the 'parallel dollar') is illegal.

Green lettuce, or 'lechuga verde' in Spanish is the way that Venezuelans have found to know the current exchange rate via the Internet.

One dollar is worth 2.6 Bolivars at the official exchange rate, but this quotation is only permitted by government for basic needs, as imports of food and medicine. The oil dollar is set at 4.3 bolivars and should in theory work for buying or selling the rest of merchandise and necessities. However, with the drop in output and oil prices, the Venezuelan government does not have sufficient foreign exchange to finance all imports of the country, which reach over 85% of consumption.

This has spurred a huge black market as importers struggle to get their hands on dollars. The parallel exchange rate is closer to 9 to 1. This is today's' quotation at 8PM, from the lechuga verde site:

Chavez handles this problem by forbidding to mention the existence of a black market for dollars in public. Hence, the Green Lettuce.

Catalonia has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year. Catalonia represents one fifth of Spanish gross domestic product.

Galicia, has asked to freeze payments of debt it owes the central government

Madrid region postponed a bond sale last month.

Bloomberg reports that Spain’s regions, which used to borrow at similar rates to the central government before the global credit crisis, are key to the government's drive to get the budget in order and push down the country’s borrowing costs. They control around twice as much spending as the state and employ more than 50% of all public servants. They also accumulated significant debt during the recession.

"Banks are nevertheless charging Catalonia more for loans than the building companies stung by Spain’s construction slump. The region, which attracts more tourists than any other in Spain, paid 300 basis points more than three-month Euribor for 1 billion euros of four-year bank loans last month, a spokesman said".

Catalonia sold 1 billion euros of five-year debt in June, but it has not issued a benchmark-sized bond in public markets since March ("even after taking a road show to Asia in April").

“Debt markets closed” as Greece’s fiscal crisis spread through the euro region in the second quarter, said spokesman Adam Sedo last month. At 5.5%, the yield on Catalan 10-year bonds is on a par with Peru."

Following Greece

In May the EU drpped the 1T bailout deal by getting around its own no-bailout clauses and backstopping countries threatened by contagion from Greece’s crisis.

"Letting a region fail would also push up Spain’s own bond yields and would be “suicide,” said the chief economist at Intermoney Valores, Spain’s biggest bond dealer.“It would be absurd -- you don’t let a bank fail but you let a region fail?”.

"Catalonia isn’t the only region that may hurt Spain’s budget battle. The autonomous community of Madrid postponed a bond sale on July 30 because of “market conditions.” Galicia is lobbying the Finance Minister to put a moratorium on 2.6 billion euros it owes the central government and to double the time it has to pay the money back. Salgado refused on July 27".

Fresh in the heels off Cisco's disappointing news, Economists polled by Bloomberg say that U.S. growth forecasts and hiring will be smaller. New estimates are that GDP will grown just 2.55% (per year) in the 2nd half od 2010, down from the 2.8% pace projected last month.

In addition, estimates for household purchases will rise 2.25%, compared with the 2.6% previous forecast.

"Federal Reserve policy makers yesterday also lowered their sights on the projected speed of the economic rebound, prompting officials to take additional steps to bolster the economy for the first time in a year. Slack growth will push back the first increase in the central bank’s target interest rate until the second half of 2011, according to the Bloomberg survey".

"Consumer spending, which accounts for about 70 percent of the economy will grow 1.5 percent this year, down from a 2.4 percent gain forecast a month ago, according to the survey median estimate. In addition to the lowered expectations for the second half of 2010, the downgrade also reflects the annual GDP revisions issued by the Commerce Department last month".

Hiring

With regards to hiring: "After boosting payrolls by 200,000 workers on average in March and April, companies scaled back the pace of hiring to an average 51,000 over the past three months. The jobless rate held at 9.5 percent in July and reached a 26-year high of 10.1 percent in October".

"Joblessness will be slow to fall, signaling it will take years for the economy to recover the more than 8 million jobs lost during the recession that began in December 2007. Unemployment will average 9.6 percent in 2010 and 9.1 percent next year, according to the survey".

Friday, August 6, 2010

Here is the latest INO video analysis of where oil is headed. Oil had massive move-up in crude oil on Monday and created a new dynamic the market. The move to two-month highs completed a major technical formations.

Thursday, August 5, 2010

Itau-Unibanco, the excellently-managed Brazilian bank which trades in new York under symbol ITUB (click to receive buy/sell alerts), Itaú announced net income of R$ 6.399 billion in the first half of 2010, up 39.6% over the same period last year. It was the highest result among Brazilian private banks.

The bank's profit also rose in the second quarter, to R$ 3.298 billion, against R $ 2.429 billion a year earlier. The result came in slightly above expectations of analysts.

Expansion in loan portfolio

The improved results in the first half is attributed, among other factors, the expansion of loan portfolio. During the period, the loan growth was 11.4%, with total balance of $ 296.2 billion.

The bank's total assets amounted to R $ 651.6 billion, a growth of 9.3%. With this number, the bank remained as the largest private financial institution in Brazil.

Equity grew 16.5% and ended in June for $ 55 billion. Gross profit from financial intermediation was R $ 14.9 billion, down 7.4% compared to the number of the same period last year, when it was $ 16 billion.

Tuesday, August 3, 2010

Kinross announced it is buying red Back Mining for just over $7B today. The move creates a new major gold company, something that had been expected. However, KGC is being punished and its stock is down over 5%. The combination Kinross Red Back has the potential to be a major force.

Below are straddles for KGC for August and November, computed with the free StraddlesCalc Tool.

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

"The Canadian group is hinting its target's Mauritanian mine contains more of the yellow metal than thought. It thinks it has good reason for its optimism. It bought a 9.4% chunk of Red Back in May and then looked over the mine in question. It isn't allowed to disclose exactly how much gold it thinks is in the ground until it performs a more thorough analysis. But Kinross management says the mine should provide excellent growth for quite some time".

Stock markers bizarrely soared yesterday, and this morning we get 'news' that consumer spending 'unexpectedly stagnates'. One can only wonder for whom this was unexpected. With an unemployment rate of around 10%, what did they expect?

Bloomberg reports also personal income did not increase 'for the first time since September and the savings rate rose to a one-year high'.

"Demand may take time to improve as the unemployment rate hovers near a 26-year high, shaking confidence in the economic recovery. At the same time, Ben S. Bernanke yesterday said consumer spending, which accounts for about 70 percent of the economy, may “pick up” as wages rise."

“Consumers are still a bit cautious,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who forecast spending would be unchanged. “The biggest driver for spending is going to be jobs. You need stronger economic growth to generate job growth.”